When defaults do occur, the repercussions have a multiplier effect. Individuals who default risk unforeseen and long-term damage to their credit scores, garnishment of future wages, increases in their actual loan balance because of additional collection fees and, most important, the possibility of being denied most forms of consumer credit for years to come.
Colleges and universities also suffer when their students default on their education loans, risking eligibility to receive continued funding from the federal student loan program. American taxpayers also bear a significant burden when defaults happen. Each year, education loan defaults cost the U.S. federal government billions of dollars — money that could be used to fund grants or education priorities.
The good news, however, is increased focus on default-prevention strategies has led to dramatic improvements in student loan defaults. In 1990, more than 22 percent of all Stafford loan borrowers entered default during the first two years of making payments on their loans. By 2008, the cohort default rate for the federal student loan program had fallen into the single digits.
A number of reasons are responsible for the drop in defaults, including the productive team approach between lenders and guarantors in collaboration with schools to develop more effective and innovative strategies and outreach efforts to educate and counsel borrowers on the negative consequences of default.
With funding and direction from guarantors, like USA Funds, Sallie Mae provides an extra measure of default prevention effort to assist borrowers who have fallen 60 days or more behind in their loan payments. Since 1997, Sallie Mae has partnered with thousands of colleges and universities to develop successful default prevention strategies for students. These efforts are complemented by the important role guarantors play in providing borrower assistance and advocacy services to students. Last academic year, Sallie Mae’s company-wide default prevention efforts successfully averted default on nearly 93 percent of seriously past-due education loans.
Because of these default-prevention efforts, 2.6 million customers resolved their delinquencies and returned to current status in academic year 2008–2009. That translates into approximately $37 billion in savings for U.S. taxpayers in terms of potential loan defaults that were averted.
Mary Gilbert (PDF 396KB) was one of Sallie Mae’s customers who successfully paid in full last year, making her final student loan payment in January 2009. A 2005 graduate of Mississippi’s Meridian Community College with a degree in nursing, Ms. Gilbert experienced a series of personal and financial setbacks during her repayment period, including job loss and family medical issues, and avoided default by setting up a temporary payment relief plan.
“They were wonderful. They worked with me to set up a payment arrangement so that I was able to get back on track, which is what I wanted all along,” said Ms. Gilbert about Sallie Mae’s default prevention specialists. "People don’t realize that defaulting on a student loan is something that follows you for a long time." Today, Ms. Gilbert is employed by a large hospital in Houston and uses her student loan repayment experience as valuable learning lesson for her three young daughters.
Congress is currently considering H.R. 3221, The Student Aid and Fiscal Responsibility Act of 2009 which includes structural changes to the federal student loan programs. Sallie Mae continues to advocate for enhancements to this legislation as outlined in The Student Loan Community Proposal that would enhance default prevention success by requiring all student loan service providers to share in the risk of loan default. The Student Loan Community Proposal would also preserve choice and competition in loan servicing and loan origination by affording numerous originator and servicers, including smaller, regional, state and non-profit providers, the opportunity to compete to provide quality service to students.
More information
Learn more about how Sallie Mae and its guaranty agency partners help students avoid the negative consequences of default.
Learn more about alternative proposals to reform the federal student loan programs.